Shiller: Real Chance of Japan-like Housing Slump in US

Robert Shiller, who coined the term “irrational exuberance,” is one of our favorite economists. He really nails it here on the structural shifts taking place in housing. We agree there is a generational change going on in the sector where the younger “connected” cohort groups are shunning McMansions in the ‘burbs.

Also, the risks of a Japan-like multi-decade slump in housing is much higher than the markets perceive. Is Mr. Bernanke listening?

Many young people are choosing to live at home for a longer period of time instead of buying. Moreover, would-be homebuyers are settling into modern apartments and condominiums, further hindering a housing rally. Shiller says the shift toward renting and city living could mean “that we will never in our lifetime see a rebound in these prices in the suburbs.”

A perpetually sluggish housing market, which Shiller believes has become “more and more political,” might push the country in a “Japan-like slump that will go on for years and years.”

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A permanent suburb slump does seem practical, though I think the prospects for condos are not much better. There is a large surplus of condos around the US and that will hold the prices down for a few years. Also mentioning affordability is a sign that the bubble mentality is still there.